One-stop shopping overseas is problematic

Gail MarksJarvisTribune staff reporter

If you like the ease of index investing, you would think investing throughout the world would be snap.

Instead of worrying whether you had too much or too little exposure to developed countries or emerging countries, you'd pick one index for the entire world and be done with it. That single fund would give you everything you needed--one investment that would allow you to partake in the world economy.

But international investing has been more complicated than that. Unlike the U.S., where you can invest in the Dow Jones Wilshire 5000 index or MSCI Broad U.S. Market index and have the full array of U.S. stocks in one mutual fund or exchange-traded fund, international investing with indexes doesn't allow one-stop shopping. To invest in the entire world beyond the U.S., particularly via an ETF, you generally have to tinker--blending indexes.

In the simplest approach, you can buy exchange-traded funds, known as ETFs, and combine the MSCI EAFE index for stocks primarily in developed countries and the MSCI Emerging Markets index for developing countries. To put the proportions in line with the world's economy, you might place about 8 percent of your international stock money into the iShares MSCI Emerging Markets ETF and the rest in the iShares MSCI EAFE.

If you wanted a shortcut, you could choose the Vanguard Total International Stock index mutual fund, which also is available via an ETF. Then Vanguard does the mixing and matching for you--selecting three indexes for European, Asian and emerging-market stocks, although it is weighted into larger company stocks.

But if your goal is to buy a single index, and drop the full international economy--down to very small stocks--into your portfolio with an exchange-traded fund, that avenue is not yet available.

That might seem surprising given the fact that ETFs are hot, and poured onto the market at a rate of almost one per day in October alone. But until recently, many of the new ETFs have been designed around tiny, focused investments that appeal to heavy traders like hedge funds. They can buy ETFs that invest only in gold to those that invest only in biotechnology companies or currencies.

About 70 percent of the buying and selling of ETFs occurs among institutions that speculate on the ups and downs of indexes, rather than buying a diversified long-term investment, said Dodd Kittsley, State Street Global Advisors ETF research director.

Still, international markets are becoming the newest focus of the fast-growing $400 billion ETF industry. And some are expected to be attractive to individual investors who want a one-stop international investment they can buy and hold.

Currently, the MSCI EAFE index encompasses about 21 developed markets in Europe, Australasia and the Far East, and includes about 80 percent of the world's market value outside of North America, according to Paul Mazzilli, Morgan Stanley ETF analyst.

But that misses the areas that have been the super-charged investments of the last three years--smaller companies and emerging markets. The average emerging market mutual fund has climbed 31.3 percent annually over the last three years, while those investing in large companies have climbed 20 percent, according to Lipper Inc.

Of course, there is nothing wrong with 20 percent, and Morningstar Inc. analysts have been warning investors over the last couple of months to beware of holding significant amounts of either emerging markets or small-cap foreign stock funds because of their extraordinary recent returns.

But coming new indexes would give investors diversification--a buffer against an oversized bet on any part of the international market.

Russell Investment Group, which designs indexes that are licensed by ETFs, is expected to roll out a broad international index that will represent about 98 percent of the investable stocks throughout the world.

And State Street Global Advisors, which has created the Street Tracks ETFs, has asked the Securities and Exchange Commission for permission to release a fund mimicking the very broad MSCI ACWI (ex-US) index.

The index would reflect all but the smallest companies, Kittsley said.

With international markets outperforming U.S. markets during the last three years, and with investment managers emphasizing the need to invest globally, State Street is attempting to serve an area where "we think there is a lot of pent-up demand," he said.

The U.S. makes up about 46 percent of the world economy, so concentrating only on the U.S. at a time of fast growth elsewhere is not wise, Mazzilli said. The Morgan Stanley Global Wealth Management group suggests U.S. investors invest 14 percent of their portfolio in international stocks.

Contact Gail MarksJarvis at gmarksjarvis@tribune.com or leave a message at 312-222-4264.